The natural rate of interest: information derived from a shadow rate model

Ajevskis, Viktors

doi:10.1080/00036846.2020.1757029

Cited by 11 publications

(10 citation statements)

References 28 publications

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“…Alternatively, they also estimate an arbitrage-free term structure model with shifting endpoints, but without these endpoints being informed by macroeconomic trends (dubbed "estimated shifting endpoints"). Their work importantly expands a sparse earlier literature taking initial steps towards incorporating 'shifting end points' for short-term rate trajectories including Kozicki and Tinsley (2001);Dewachter et al (2014); Ajevskis (2018); Christensen and Rudebusch (2019). As Bauer and Rudebusch (2019) incorporate the time-varying natural nominal rate (natural real rate plus trend inflation) by either using an average of respective estimates from other studies or by extracting it as a latent variable from bond yield variation alone, part of the trend in bond yields is attributed to short rate expectations rather than having the term premium explaining the bulk of the trend decline in yields.…”

Section: Introductionmentioning

confidence: 77%

Natural Rate Chimera and Bond Pricing Reality

2020

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Incorporating arbitrage-free term-structure dynamics into a semi-structural macro-model, we jointly estimate the real equilibrium interest rate (r *), trend inflation, and term premia for the United States and the euro area, using a Bayesian approach. The natural real rate and trend inflation are cornerstones determining equilibrium yields across maturities and macroeconomic trends. Taking into account the secular decline in equilibrium rates, term premia exhibit cyclical behavior over the business cycle, rather than the commonly reported trend. Our estimates suggest a fall in r * from a pre-crisis level of about 3% to around zero, but estimates are subject to sizeable uncertainty. Including survey expectations can lift r * estimates for recent quarters by a margin.

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Section: Introductionmentioning

confidence: 77%

Natural Rate Chimera and Bond Pricing Reality

2020

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“…This paper estimated the natural yield curve for Brazil, a concept introduced by Brzoza-Brzezina & Kotłowski (2014) and Imakubo et al (2018) that extends the concept of natural rate to the yield curve. This follows the strand of the literature that tries to obtain measures of natural rates from financial market data (Bomfim, 2001;Christensen & Rudebusch, 2017;Ajevskis, 2018).…”

Section: Resultsmentioning

confidence: 99%

“…Several different methodologies were employed by Muinhos & Nakane (2006), Magud & Tsounta (2012), and Perrelli & Roache (2014). This paper seeks to contribute to the literature on natural rates in Brazil through the use of yield curve data, as in Bomfim (2001), Christensen & Rudebusch (2017), and Ajevskis (2018).…”

Section: Introductionmentioning

confidence: 99%

The natural yield curve in Brazil

Filho¹

2019

Braz. Rev. Fin.

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<p>This paper estimates the term structure of natural interest rates for Brazil, a generalization of the concept of natural rate of interest for the yield curve. First, the Diebold-Li (2006) model is estimated with real yields. The latent factors of this model are then used in a model that includes an IS and a Phillips curve. The natural yield curve is obtained as the level, slope and curvature that closes the output gap at each point in time. This decomposition allows a broader indicator of the stance of monetary policy and a real-time measure of the natural rate. The difference between the slope of the real curve and its natural counterpart is highly correlated with the output gap.</p>

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“…Macro-finance models: Christensen and Rudebusch (2017) have extracted similarly slow-moving estimates of real interest rates from financial markets data using affine term structure models capturing macro-economic variables. In this report, results for the euro area from the macro-finance model by Ajevskis (2018) are reported (see Annex B.6).…”

Section: Semi-structural Modelsmentioning

confidence: 99%

The Natural Rate of Interest: Estimates, Drivers, and Challenges to Monetary Policy

2018

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Using a wide range of models we document a protracted fall in the natural (or neutral) rate of interest in advanced economies, driven by ageing, waning productivity growth, a rise in mark-ups, and a surge in risk aversion in the wake of the global financial crisis. While our neutral rate estimates are highly uncertain and model dependent, most of them have been negative in the wake of the financial crisis. This observation is highly relevant for assessing the monetary policy stance and the risk of monetary policy becoming constrained by the lower bound on nominal interest rates. We highlight model dependence of natural rate estimates by illustrating large differences in their stabilising properties, depending on the context chosen. We also emphasise high statistical uncertainty of natural rate estimates within models. Looking ahead, a return to higher levels would have to come from a reversal in risk aversion and flight to safety and a boost in productivity. To achieve this, structural reforms are crucial.

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The natural rate of interest: information derived from a shadow rate model

Cited by 11 publications

References 28 publications

Natural Rate Chimera and Bond Pricing Reality

Natural Rate Chimera and Bond Pricing Reality

The natural yield curve in Brazil

The Natural Rate of Interest: Estimates, Drivers, and Challenges to Monetary Policy

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